What CPAs Need to Know About Surcharging for Credit Card Fees

John Lehman

Mar 30, 2018

Accepting credit card payments inevitably means paying processing fees. This is essentially because there’s a cost to move money within our financial systems—as CPAs know well. But as a business owner, you’re always looking for ways to manage your costs and operate more efficiently, so you may be wondering what your options are for passing on processing costs to your clients in the form of a surcharge.

Below, we’ll break down exactly what surcharging means, its legal status in the United States, and how the practice might negatively affect your clients.

First things first: What is a surcharge?

In the context of credit cards, surcharging is defined as adding up to 4 percent on credit card transactions to recoup payment processing costs. The practice became permissible to merchants in 2013 in the wake of a class action lawsuit against Visa and MasterCard.

It’s important to note that a surcharge is distinct from a convenience fee, which is a relatively older but similar term in the credit card lexicon. A convenience fee is a flat rate, for example, $1.95, that can be added to both debit and credit card transactions. It’s a cost passed to the customer to give them the option of paying in a way that’s convenient to them, hence the name.

Surcharging comes with rules and regulations

In some states, surcharging has been outlawed as an anti-consumer practice. According to Visa’s Rules and Policy page as of this writing, Colorado, Connecticut, Kansas, Maine, Massachusetts, Oklahoma, and Texas all have laws prohibiting surcharging.

But the illegal status of surcharging may be up in the air. Legal cases in New York state, Florida, and California have raised questions about whether anti-surcharge laws will remain in effect much longer.

If your state allows it and you choose to surcharge, you’re required to follow rules put in place by each credit card brand. For example, your surcharge can’t exceed the cost of your processing fee—if your all-in rate on a transaction is only 3 percent, you can’t apply a 4 percent surcharge. You must inform the card brands and your clients of your intent to surcharge at least 30 days before you start surcharging. Also, surcharging isn’t allowed on debit card transactions—only on credit cards.

What are the downsides of passing processing costs directly to clients?

Now that we’ve covered the basics, let’s explore some of the drawbacks if you’re thinking about surcharging. On one hand, the allure is clear: you want to recoup the costs of accepting credit card payments by transparently passing them on to your clients. After all, they’re the ones who want to pay with a credit card, right? But the truth is, this approach can have unforeseen consequences.

Offering clients online payment processing is easy, convenient, and fast. If you add a surcharge that’s too high it can create a hurdle that makes clients stop and reevaluate how they’re paying you. They may decide to abandon the online payment process and opt to pay you by a slower method, like a paper check. Some clients could be so turned off by surcharges that they take their business elsewhere.

“It is very easy to shop around for almost anything these days, and if a merchant raises prices via an added fee, customers may be tempted to look for a better deal,” says Elaine Pofeldt of creditcards.com.

There’s also the deeper psychology of billing to consider. Even though some clients will pay the added cost, you risk building resentment within them over time if they feel like you’re nickel-and-diming them each time they see a surcharge as an additional line item on their receipt. The reality is, not many businesses pass on the cost of credit card processing to customers these days—it’s just not the norm, which makes it all the more jarring to your clients.

Another option for recouping these costs is to build them into your rates with a minor price increase across the board. A small rate increase of 1 or 2 percent isn’t likely to be felt by your clients and can help make the cost of accepting online payments more manageable for your firm. Of course, you’ll still have to ensure that your pricing is competitive compared with other CPAs in your area—if you end up charging more, you may scare off potential clients.

Because of these factors, many businesses avoid surcharging altogether, and accept payment processing as one of the costs of doing business in today’s economy. Instead of passing the costs to clients, these professionals absorb them into their businesses, taking them out of profit margins. In fact, they often find that the increase in cash flow from accepting online payments outweighs the cost of processing fees. The bottom line is, your clients will appreciate being able to pay with a more convenient payment option without being penalized for it.